Edited Transcript of 9434.T earnings conference call or presentation 4-Aug-20 7:00am GMT

Aug 4, 2020 (Thomson StreetEvents) — Edited Transcript of SoftBank Corp earnings conference call or

Aug 4, 2020 (Thomson StreetEvents) — Edited Transcript of SoftBank Corp earnings conference call or presentation Tuesday, August 4, 2020 at 7:00:00am GMT

SoftBank Corp. – COO and Head of Consumer Business Unit, Product & Marketing Unit

SoftBank Corp. – CTO, Head of Technology Unit & Technology Strategy Unit and Representative Director

SoftBank Corp. – CFO, Executive VP & Director

SoftBank Corp. – CEO, President & Representative Director

SoftBank Corp. – COO, Enterprise Business Unit Head & Representative Director

Ladies and gentlemen, thank you very much for waiting. We would like to start the briefing on earnings results for the 3 months ended June 30, 2020.

First of all, I would like to introduce to you today’s attendees. 3 Vice Presidents are remotely participating to this briefing session. SoftBank Corp. Representative Director and CEO, Miyauchi; Representative Director and COO, Jun Shimba; Representative Director and COO, Imai.

Yasuyuki Imai, SoftBank Corp. – COO, Enterprise Business Unit Head & Representative Director [2]

My name is Imai.

Representative Director and CTO, Miyakawa.

Junichi Miyakawa, SoftBank Corp. – CTO, Head of Technology Unit & Technology Strategy Unit and Representative Director [4]

This is Miyakawa.

Board Director, Executive Vice President and CFO, Fujihara. We are streaming this briefing live on the Internet.

Without further ado, I will ask Mr. Miyauchi to give you a briefing on the earning results and the business results.

Ken Miyauchi, SoftBank Corp. – CEO, President & Representative Director [6]

This is Miyauchi from SoftBank. I have taken off my mask because I’m far away from you. I will try not to get too close to you.

Today’s briefing is a hybrid style. We were thinking whether we should do it all in Zoom or face-to-face. Well, for the shareholders meeting, we decided to do it on Zoom, but what we have decided to do is hybrid. We have 3 Vice Presidents remotely, and we will be able to take various kinds of questions during the Q&A.

So first of all, I would like to talk to you about SoftBank’s digital shift. In the past 3 months — well, almost 4 months, was for remote work. SoftBank has always been talking about digital shift in the past 30 years. More than a decade ago, we have said we will make this paperless. And in the first quarter, we have been able to promote digital shift in a full scale. So the past 3 months were very important for us. So I would like to start by talking about that and then give you the earnings briefing.

First is about Consumer business where there are a lot of salespeople and there were mass retailers. And for about 2 months in between April and May, because we wanted to respect the lives of our workers in the shops, we decided to open our shops from 11:00 to 4:00, and the busiest time of the shops is 5:00 to 7:00 in the evening. However, we decided to shorten the operation hours, and the call center capacity was redo customers. But during that time, we were able to go through various trial and errors. We were able to move from face-to-face gathering type to non-face-to-face and remote type of activities.

The sales personnel of the Consumer business was very strong in the mass retailers, et cetera, because they conducted many kinds of promotion event. They had huge promotion power. However, from April to the beginning of May, there were closing of the mass retailers. And in June, the numbers have come back because we were able to transform ourselves in conducting the events. We utilized various types of tools, including Zoom, and we’ve distributed live streaming type events. So in addition to the conventional type of events, we added live streaming type events. And in June and July, we were able to increase the touch points with our customers.

Next is Enterprise business, which is also our main pillar. On the left-hand side, you see the conventional way, visiting the customers, having face-to-face meetings with them. We took a lot of engineers to the visitation of the customers. And we have shifted to the new normal to hosting webinars, conducting e-mail marketings. We conducted online negotiations, and we promoted remote configurations to the extent we can.

As of April, in internal meetings, we have said that we are able to provide this kind of services to the existing customers, and we said that it may be difficult to do it with new customers. But in June, we were thinking differently. We were able to make reach — outreach to the new touch points with the customers. Even though we had conventionally thought that we had to do face-to-face meetings at the beginning, we are doing it differently now. We are — we have conducted the joint webinars with Microsoft. And before, we were able to gather only 100 participants, but we were able to solicit 1,000. And if you look at this last year, we had contacted 260,000 with 3,000 salespeople. And now that has grown to 730,000 contacts.

There are many challenges still, but we now know that we can do a lot of things with digital shift. We had digital work of 4,000 project. It has been about 1.5 years since we have started this project. And we shifted 40% of the people to non-telecommunications business field and we — through conducting restructuring of the organization. Now there are 3,000 people being shifted, but now we can see a light to getting to 4,000.

Through digital shift, we were able to change the way that we do our sales activities, and we were able to significantly improve our productivity. At the headquarters of SoftBank, about 20% are working at the office, and we think that maybe our rent is going into waste, but I think that remote work is our new way of normal. And we thought that we would be impacted a lot by this situation, and we created a contingency plan, but we were able to go through the first quarter not much damaged than we had thought.

But now COVID-19 is showing the second wave, and there is still no vaccine yet. However, we believe that we can still grow our business. We had thought through the past 3 months, and through digitization, we believe that we still can grow. We are still more confident. We are more confident than we used to be for the first 3 months.

The sales. As of April, we believe that there would be a huge dip in sales. And in the first and second quarters, we will go down. But in the third and fourth quarters, we were thinking of the rapid recovery. Our business had diversified, and because of that, even with the COVID-19 impact, we were able to increase the total revenue.

And if you look segment by segment, well, Mr. Kawabe had made announcement of the performance recently, and Yahoo! is doing well. And there are a lot of inquiries about digital shift from various listed companies in Japan as well as various SMEs. So the Enterprise business is going very well.

In April and May, well, because the shops services were face-to-face, we had to close it, and there was a significant decline. But from June, we were able to recover significantly. And the operating revenue has gone up by 4% at JPY 270.9 billion. Yahoo! was able to grow by 40%, if you look by segment by segment. And the Enterprise business has grown by double digits. And in Consumer, there was — it maintained the previous year’s levels.

Inclusive of the contingency plan, what we have been thinking about was that COVID-19 situation may continue well into the future. Because of that, we decided that it would be essential to increase the cash. That’s what Mr. Fujihara has strongly recommended. We conducted securitization, and compared to last year, we have increased the adjusted cash flow by 49%. So whatever happens, we would be able to keep ourselves on the safe side in the management of our business.

As for the net income, last year, we sold Cybereason. And because of that, there were various onetime factors. And compared year-on-year, there was a decrease. However, if we exclude those factors, it remained almost flat. So compared to the plan, the JPY 4.9 trillion revenue with JPY 920 billion of operating income with a net income of JPY 485 billion, the progression rate is 24%, 30%, 31%, respectively. We would be able to steadily move towards our goal.

Now I would like to move on to talk about business by segment. The Consumer business. There was a revision in the Telecommunications Business Act. There was entry of Rakuten, et cetera. And there was a drop in handset sales in April, but we were able to recover in June. So overall, there was a slight decrease. But Enterprise was able to contribute in the sales of the handsets.

In any case, the revenue level, at a telecommunications service, we were able to keep last year’s levels under the severe situation. So operating income due to onetime factors, it declined, but the business is actually gaining good momentum. It’s about down by JPY 12 billion in handset-related. And we have first year half year discounts which is impacted by effect to see an increase in the operating income.

In terms of smartphone cumulative subscribers, as you can see here, we have 3 brands, which is growing steadily. Compared to last year, that’s increase of 2.04 million in net additions. So net additions for all brands is up 9%.

Broadband cumulative subscribers. Again, this is very steady. This is up 9%. In particular, because of increasing remote work and digital shift, we have — revenue is up 5%. Fixed line is shrinking gradually, but it’s slow. But solutions is actually growing, and now solutions has grown up to about 1/3 of the business.

In mobile, again, we have great demand as well. iMads — iPads, excuse me, different sort of pads, smartphones, these are all handsets. Terminals are necessary that’s essential for the enterprises. So in that sense, it’s very steady.

So operating income, this is not demand coming from telework, but it did drive the growth, and therefore, this has grown by 11%. So what is the telework demand? What’s the biggest for us is the network business but Internet access, VPN. So they want to expand VPN. We have many large enterprises. Customers are in demand for that. If you want to do work from home, then you need this VPN facility — Q4, generally, to the end of the year. But even compared to that, it’s about twice increase.

In web con, Zoom, I think Q4, we thought maybe would be slow, but it’s now sort of very quickly, and it’s essential. You must have it in universities, educational facilities, enterprises. Even myself in the last 3 months, almost every day, I’m using Zoom from working from home. Maybe even before — when I used to work from the office, maybe I have to work more from on the Zoom. So I have meeting with — doing a lot of web conferences.

And also voice calls. Basically, the phone you are supposed to get in your office, you can receive it, take it with your smartphones. And again, this is very popular. And there are many other services, but we see surge in demand for work from home.

Next is Yahoo!, our subsidiary. This has increased up by 15% in revenue. We thought that media will be facing a lot of challenges. And of course, [EQ] is facing difficulties as we have announced before, but it’s actually turned out to be very strong. But what’s really grown is e-commerce.

As you can see, operating income — (inaudible) last year have engaged in different M&As. And as a result, they have been growing very nice. It’s up 21%. So the Q1 was very good, although environment surrounding the company has been very difficult. Because digitization has progressed, we have done well. I think it’s a demonstration of that.

As for PayPay, I don’t think we need — don’t really need to explain to you, but we have exceeded JPY 30 million at the end of June. And again, we continue to see increase. Our target continues to be very big. I want majority of the people in Japan to be using PayPay. But more than anything else, if you look at the number of payments made, it’s really grown, in particular at convenience stores and e-commerces. You can see that it’s really stabilized. It’s only been 1.5 years, maybe less than 2 years, so I would say nearly 2 years, 1 year and 8 months. It’s a very short time since we launched PayPay. But users have really recognized this brand. And as a result, our revenue has grown by plus 1%; operating income by plus 4%. Net income is minus 8%. Adjusted free cash flow is plus 49%.

So in terms of first quarter, we know a lot of things is still yet to happen, but I think we have been able to solidify our foundations. Now I think in the previous meeting, I talked about how we want — and our plan was to talk about this in May, but because the world was so overrun by this pandemic COVID-19 issue, we weren’t sure if we should be discussing this. And in fact, if the situation continued for long term, we were uncertain about our ability to market and do sales activities. But the reason why there was a shift to digitalization is that — and what we have found was that it didn’t really decline. In fact, for us — a company like us, we realized that it was actually positive. So that’s why I wanted to talk to you about this today.

So in FY 2022, this is the road to achieve JPY 1 trillion operating income. We would like to achieve this as quickly as possible, but our target, the latest by 2022, we’d like to achieve this. So in one word, revenue is JPY 5.5 trillion; operating income, JPY 1 trillion; net income, JPY 530 billion.

So we said it, and that means that we’re making this enormous commitment. But actually, we have good grounds to say this — to announce this. I have been saying this from before. It was in 2015 that I became the President and CEO of this company. And it’s a very simple strategy and implement structural reform. As a management, that’s really the best we can do. And we have done different strategies (inaudible). But we knew 5G was coming. In fact, it’s rolled out already.

As you can see from the announcements from KDDI and NTT Docomo and even for us, the volume is not that significant yet. But 5G, we move, and I think it has the ability to really change the industrial power of the enterprises. So 5G network will connect Japan nationwide. Then we can realize the world of IoT. And at the same time, e-commerce will maybe move up a new dimension like commerce is emerging in China. So things like that. E-commerce is only about 7% or 8% in Japan. China is probably about 30% or so, close to that.

And the reason why I talked about PayPay is that we have perfectly rolled out FinTech. So in that sense, whatever that growth is all blossoming in this digital world, and it’s in our hands. And at the same time, we can implement structural reform, work style reform, cost reductions. We can bring in AI and RPA technologies there. And we have been saying this from before that with structural reform, we said we will go paperless. We will go cloud. All information will be on cloud. And that in itself had great effect. But if we add RPA and AI here, then we can have — we can step up our structural reform — great opportunity.

This challenge that we’re facing today have been showing every single time, and you may think again, but — and today, JFTC have given us a permission. And because Line is listed outside of Japan, it has taken time, but Yahoo! will become our core telecom business. In digital shift, telecom is a must. But on top of that, we have Internet application. I’m not sure if you call this application, but we have the Internet — Line as Internet. And on top of that, we have new business fields.

In particular, it could be PayPay, FinTech, WeWork. We’re attempting on these new endeavors. But 5G full-scale network becomes stand-alone, low latency, and multiple connections can be realized, so I would say that’s about end of ’21 or 2022. From then on, then it will be implemented in all sorts of industries and different opportunities. And we call this Beyond Carrier. And I think that picture is starting to get completed. So that is why I wanted to present this to you today.

There’s 4 things I want to talk about specifically. One is PayPay as a platform strategy. We want PayPay to become our platform. And at the same time, we know that smartphone will expand even more, and the enterprises would go digital. And as I said, in our structural reform, we want to do a thorough cost efficiency strategies. So on the cost side, we want to differentiate ourselves from the competitors. We want to be cost leaders. And this is not just negotiating cost reductions. It’s a structural cost reductions leveraging IT.

And finally, financial discipline and return to the shareholders. So you — I’m sure you’re already using PayPay. I’m using it all the time. The strength is, in a short amount of time, we were able to get to 30 million users. The biggest point is that there are 2.3 million shops which enable the use of PayPay. It’s not talked about so often, but in fact, there is a once-a-week software update system. This is something that has been brought by a Paytm team, which is our treasurer. Through this, if user wanted something — some functionality, we are able to add on to this platform.

SoftBank has sales capability, so we had a lot of sales force since the Yahoo! BB years, so Yahoo! engine technology. Combining all of that, we were able to create a very robust platform. Going forward, it will have financial services. There would be penetration of mobile, the boost of smartphone penetration, and we will further expand the e-commerce. PayPay is very close to universal service. It’s not just for the customers of SoftBank. Docomo customers, KDDI customers would be able to utilize this service. Through this initiative, we will have the penetration of the PayPay platform.

As for the financial service, in order to accelerate the penetration, well, there were many services. There’s still a lot of hurdles that we need to overcome, but we would like to change the brand name so that we would be able to cover almost all of the financial services. This will be a very important turning point for us. PayPay is something that you are able to use every day, 3 or 4 times in convenience stores. This is a super app. By adding on various functionality, this would enable easier recognition by the market. With PayPay as a gateway, we are able to connect various things, including e-commerce, financial services, the taxi hailing services, hotel services by linking everything. Maybe in the future, by having PayPay on your smartphone, you will be able to grow your asset.

The mobile business. We have 3 brands, and SoftBank brand is very strong now in the smartphone debut plan. So in the first year, it’s JPY 980. And next year, it’s JPY 1,980, which is very cheap. People of all ages are able to use the smartphones from the elementary school kids to elderly people. They would be able to use mobile services. What is the value of mobile services? In the past, it was about watching YouTube and Netflix or sending e-mail — payment service such as PayPay. You will be able to shop using your smartphone. And then, in the future, a program like MMF can be introduced for the provision of the financial services. And I have been saying for many years that all of everyone in Japan, all of the 100 million will be using the smart — so the mobile value, mobile service value will be further enhanced in the future from saving to have — on banks in insurance, asset management, e-commerce. Through the usage of smartphones, you would be able to do everything. That’s what we would like to realize.

In e-commerce, Z Holdings is working on Yahoo! Shopping as well as LOHACO and ASKUL. ASKUL is turning around. Last year, it was not doing so well, but now it’s doing better. As for ZOZO, they’re growing very fast, and their stock prices are surging. And PayPay Flea Market, it is also growing very rapidly. Our e-commerce and PayPay, the — we would be able to grow hand-in-hand. So for us, being able to grow e-commerce with PayPay at the pillar will be very important. So it is a platform strategy. By creating a PayPay platform, we would be able to get to the Beyond Carrier strategy that we are implementing.

As for the expansion of the smartphone usage, I think that everyone here is very knowledgeable about this. We would like to further expand the usage of smartphone. We would like to have — everyone have the smartphone in their pockets and be able to pay using their smartphones. And we will work on the Enterprise business also. By fiscal year 2023, we would like to get to the level of 30 million smartphone users. If we are able to add on 10 million each year, we would be able to get to 30 million in fiscal year 2023.

The strategy has not changed at all. There is SoftBank brand with large capacity and Y!mobile, which is cheaper and LINE MOBILE for the social media users. So we have these 3 brands by — evolves well in the market. There was no cannibalization. We are doing very well. There are 3,000 shops, and out of that, 1,800 have dual-brand with SoftBank and Y!mobile brand. LINE MOBILE application is made on the Internet, Yahoo! and PayPay collaboration. Through that, Yahoo! Shopping grew very significantly. And by continuing to work on these initiatives, we can have people upgrade these smartphone brands and to have a lower churn rate.

Another point is 5G deployment. At this point, 5G is only connected in a pinpoint manner. In March of 2022, it will get to 50,000 base stations, and the population coverage will be 90% plus. As I have said earlier, well, South Korea had large numbers to begin with. And in China, it has gotten to 100 million units level. For us, going forward, towards the end of the fall to the next year, we believe that there will be a start of 5G festival. So we thought about the future target figures. And when we get to the 30 million smartphone users, we believe that 60% will be 5G smartphone users. We have not announced this yet, but around fall of this year, 5G handset, a low-range, mid-range, high-range handsets will be launched. If it’s just the high-end handset, it will not be sold in large numbers, but there would be full-scale launch of the 5G handset. So there would be a shift from 4G to 5G in full scale. That’s what I expect for the future.

Next is the Enterprise business. The Enterprise digitization demand will not stop. So the remote work, digital marketing, digital sales, if the enterprises are not able to conduct those initiatives, they will go out of Enterprise business. We started out with selling network, the fixed line telecommunications, mobile communications or data centers. And what’s growing now is the cloud business. This is, by far, the most important. The market cap of the data centers around the world have gone up significantly. It’s very significant.

(inaudible) and digital [DRI]; GDS, a Chinese company, they have gotten to JPY 6 trillion to JPY 7 trillion level; and GDS, JPY 1 trillion on market cap. But we are not just talking about the data center, but through the digital shift, the data center demand is growing in a large scale and many times has been saying that the keyword is cloud. IoT started from there, and security was added on. So in that sense, going forward, the solution business will have — will see a double-digit growth every year, in my opinion.

The digital solutions will increase. And even now, we are very busy. And I have said that the contact with the customers is about 3x, and that really shows it. And the large companies are working on this, but the small-scale companies are working on this as well because they cannot open the stores and they’re moving from — moving to D2C. So the digitization demand of the companies will be solved through our solutions: AI, IoT, 5G. Those will be utilized in the near future in about 1 year time. The online medical care, smart cities, smart distribution, smart supply chain will be realized through our solutions. That’s the future that I predict.

This is the growth strategy that we envision. And out of that, so I would like to start this out. The Consumer will increase in profit. And our Enterprise business will increase each year with double-digit profit. And Yahoo! is on increasing profitably. They have already committed to this number, JPY 225 billion in FY 2023. So they will endeavor to achieve and be #1 in EC transaction value in Japan and also in new business fields.

PayPay is generating large losses, but we have no doubt that it will peak out on losses. And there are other investments such as SB Payment Service, this is steady; Cybereason; WeWork; OYO. There are many companies that we are investing, which we know that loss — they will peak out on loss. So now we’re finally starting to see that picture becoming reality.

So let’s look at our cost containment efficiency strategy. First of all, fixed cost will remain flat. We are endeavoring our new businesses one after another, but fixed costs will remain flat. If you investigate, we have JPY 1 trillion in fixed costs. Of course, we have large depreciation and amortization costs as well. But that’s the size of the business we’re engaged in. Going forward, we will keep the fixed cost at JPY 1 trillion, while the sales will be JPY 5.5 trillion.

So in order to grow, we need to put our wisdom together. We need to leverage our digital capabilities, carry out structural reform. While we maintain our cost, we will realize increase in revenue and profit. In particular, we will — first of all, in the first half, the reason — or first quarter, the reason why we have decided to include this is that we have — it became clear that digital shift fundamentally changes how we work. So we have been able to improve productivity drastically. And at the same time, we have been able to make our network more efficient and optimize it. And we will continue to work on this. We are — have decided to build the network infrastructure together with KDDI, which is our competitor, but we want to work together. And also, the group synergies will be realized as well. And it’s quite a significant amount.

That’s Z Holdings and SoftBank doing a joint procurement. SoftBank, in terms of procuring materials and equipment, we’ve been doing — purchasing 5G network equipment from before. So the way we procure, when that is communicated to Z Holdings, they have been able to reduce the cost by JPY 7 billion, just by Z Holdings implementing the way we do it. And this is not just the entire full year. Every time I look at (inaudible) I say that you can do much more than that. And we have many group companies. We can make them more in-house. We have many different services. For example, payment services, different services, even in Yahoo! we have engineers. They have engineers. We can make them all in-house services. And with that, we can also reduce cost.

And we have digital work of 4,000 projects. This again is the cost reductions and also shift of people resources into growth strategy, growth areas.

And finally, financial strategy and returns to shareholders. We see political tensions between China and U.S. Different events occurring around the world. COVID-19 may continue. We may have other infectious diseases, pandemic. So basically, we don’t know what will happen. Just the other day, there was a very large disaster in Kumamoto Prefecture. So we need to be able to generate stable free cash flows. This will allow the company to survive no matter what happens. And at the same time, we need to improve our financial leverage, improve that as well.

And since we have gone public, we have been committed to high and stable shareholders returns, and we will maintain this. So in that sense, operating cash flow, as you can see here, will continue to be — will continue to increase steadily. CapEx, I talked about 50,000 base stations of 5G. We want to actually even increase more in the future, but I won’t talk about that. But at least by 2022, we want to have 50,000 stations. But our cap for CapEx is JPY 400 billion for that. We will not spend any more than that. We can still do it with JPY 400 billion. That’s the efficient way of spending our money. And every year, after we pay out our dividend, we went within a budget of JPY 50 billion to JPY 70 billion, invest in growth.

Last year, we had large M&As, Line, Yahoo!, one after another. So I don’t think we have a very large shopping we can do for a while. But in terms of continuing for growth, we need to invest. So that’s what we have in mind. And we will generate stable free cash flow. Adjusted free cash flow each year will be at least JPY 670 billion, so it will be more than that. And through this, we can improve our financial leverage and realize high and stable shareholder return.

With regards to financial leverage, we will improve from 2.4x. Now because of this low interest rate environment, we do need to leverage, but we need to also make sure that our company remains stable, so we will improve our leverage ratio. And we also want to return to the shareholders. We will maintain this total shareholder return ratio of around 85%. Now we will not reduce our dividend.

As you can see, we have increased our dividends from JPY 85 to JPY 86, so we will continue to increase that. But aside from this dividend, if there’s surplus, we will also do buybacks. Shareholders have made many suggestions to us. So we’ll look into buying back our shares.

So with this, we will achieve JPY 1 trillion operating income in 2022 and achieve a total shareholder return ratio of around 85%.

So you — please review this number, JPY 5.5 trillion, JPY 1 trillion, JPY 530 billion. Easy numbers to remember right? I have to keep — remember this and commit to this. So thank you very much for your attention.

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Unidentified Company Representative, [7]

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Thank you very much. We would like to move on to the question-and-answer session. (Operator Instructions)

Please wait until we make a preparation.

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Questions and Answers

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Unidentified Company Representative, [1]

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We are ready to take questions. I would like to, first of all, I take the question from this venue. And after that, we will take questions on the Zoom. (Operator Instructions)

In the center, the fourth row.

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Unidentified Participant, [2]

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From Nikkei Newspaper, my name is [Noguchi]. There are 2 questions. The first question is, in terms of the operating income progression rate, last year, it was — just like last year, it has exceeded 30%. And you said that the COVID impact was not as big as had been expected. But as for the handset, handset sales have decreased by JPY 12 billion. And I was wondering how that will go from second quarter on. And as for the progression rate of 30%, would it — is it higher than you had expected?

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Unidentified Company Representative, [3]

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You said 30%, what do you mean?

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Unidentified Participant, [4]

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The operating income progression rate.

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Unidentified Company Representative, [5]

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Understood. As for the handset sales, there was — in the first quarter, there was a decrease by [160,000] because we were under a state of emergency. We had the alternating shift of the 50% of the workers. And because of that, there was a decrease in the handset sales. But there was an increase in enterprise sales of the handsets, and we were able to suppress the decrease amount. Going forward, towards the second half, we believe that the handset sales will grow.

Mr. Shimba, you are participating. So maybe you can make a comment remotely.

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Jun Shimba, SoftBank Corp. – COO and Head of Consumer Business Unit, Product & Marketing Unit [6]

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Thank you very much for the question. Under the COVID-19 situation, we have been impacted. In June to July, we have recovered to the operation level of the normal times. And because of that, we were able to recover rapidly. If we are able to maintain this level, we will be able to get to the number we have committed to you.

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Unidentified Participant, [7]

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And as for your progression rate of 31%?

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Unidentified Company Representative, [8]

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I would like to supplement about the handset sales. And as — and there was the reversal of the provisions last — that JPY 12 billion of rebound will disappear from second quarter on. So 30% progression rate, it is going steadily. So that’s our view of this 30% figure.

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Unidentified Participant, [9]

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The second question, as for the equity method companies losses. So I would like to ask about the sale that you had last year, JPY 5.4 billion of sales on the equity method company. And what was that? And also JPY 3.6 billion of losses. What is this? And is this something that will occur from the second quarter on?

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Unidentified Company Representative, [10]

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Mr. Fujihara, can you answer?

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Kazuhiko Fujihara, SoftBank Corp. – CFO, Executive VP & Director [11]

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So we did not disclose the brand, but there was selling off of stocks last year and also evaluation matter — [million]. The biggest portion comes from PayPay, but PayPay is improving. So compared — so in the second quarter, we don’t believe that this will be increased.

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Unidentified Company Representative, [12]

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Any other question? Center block, the gentleman in the very front, gentleman on the right-hand side.

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Unidentified Participant, [13]

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[Ishikawa], I’m a freelance writer. 2 questions. First question, the other day, LDP has talked about restricting apps that have been developed in China. I was wondering DiDi will be part of these restrictions. Is that a problem?

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Unidentified Company Representative, [14]

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I don’t think DiDi would have an issue. We’re doing DiDi Japan, but the service are all run in Japan. In fact, the AI engine of DiDi, the systems have been — we are using, but the data will not be sent over to China. There’s no way the data will be transferred to China. We’re very strict about this. I mean, I’m not sure what Mr. Trump is saying. But at this point in time, there’s no concern.

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Unidentified Participant, [15]

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Second question. So business integration between Line and Yahoo! has more visibility now. Is it possible that you will eliminate the Yahoo! brand in the future?

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Unidentified Company Representative, [16]

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I don’t think so, but they are now a new company called Z Holdings, [Kizawa-san] and Mr. Kawabe, what I’m sure will discuss. And us, their neighbor, will discuss as well. So I think it’s really dependent on that. But Yahoo! has a great brand equity in Japan. So I highly doubt it, but I am not in a position to answer that today.

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Unidentified Company Representative, [17]

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I would like to designate the person sitting next to the previous questioner.

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Unidentified Participant, [18]

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From Weekly Diamond, my name is [Marai], and I have 2 questions. My first question is from April to June. There was increase in the revenue and profit, meaning that you grew very handsomely, and free cash flow had grown by 49%. And I believe you did not invest during this time, and you were able to increase the free cash flow. Or was the business performance better? Well, it seems that Yahoo! did very well. So what was the good aspect that led to the increase in the free cash flow?

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Unidentified Company Representative, [19]

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Mr. Fujihara will be able to explain to you in details. But in any case, from the end of March, we believed that COVID-19 situation will not go away very easily. And because of that, we decided that we need to have accumulation of free cash flow in order to respond to the situation. So the details can be explained by Mr. Fujihara.

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Kazuhiko Fujihara, SoftBank Corp. – CFO, Executive VP & Director [20]

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The biggest is securitization and generation of cash and adjusted cash flow. With the relation to covenants, we have booked it inclusive of securitization in the disclosure. So through securitization, we were able to increase the amount of cash. The fourth quarter on the balance — we try to improve the balance sheet, so we suppressed securitization. So because of that, there was a slight rebound. So it seems that the cash flow is bigger than our actual capability.

But our cash is king, cash flow is the queen, is the slogan by our President. And inclusive of the parent company and the subsidiaries, everyone was working towards the accumulation of cash. So that’s why we were able to see increased cash flow.

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Unidentified Participant, [21]

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If that’s the case, the securitization — inclusive of the securitization, it was more about the financial policy. So it is not the increase in the operation cash flow.

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Kazuhiko Fujihara, SoftBank Corp. – CFO, Executive VP & Director [22]

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Well, the business was moving very steadily. So we were able to generate good operating cash flow. But in addition to that, there were securitization initiatives.

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Unidentified Participant, [23]

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So operating cash flow is not decreasing, right?

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Kazuhiko Fujihara, SoftBank Corp. – CFO, Executive VP & Director [24]

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The operating cash flow is solid. The business is doing well. So that’s, thus, the results of the free cash flow.

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Unidentified Participant, [25]

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The second question, so you have the operating income target of JPY 1 trillion for fiscal year 2022. And do you factor in the integration with Line?

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Unidentified Company Representative, [26]

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No. If that’s the case, there is a — there is a potential for upward. So Line said that they were in red ink in their earnings briefing. But working together, we are able to grow. Yahoo! is doing better. So we would like to create group synergy. I think that there is a possibility for additional growth.

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Unidentified Participant, [27]

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So you said you wanted to make PayPay a super app. You were emphasizing on that point. The Line is not — in that case, it will not be a super app. But if PayPay is a platform, how will line be positioned at this point?

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Unidentified Company Representative, [28]

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So we — I think that JFTC is having a press conference and okaying the integration. But for the business going forward, I would like to talk about that on a later date. Line has 80 million users. So they are already a super app.

In that sense, how we will be able to work together with them to capitalize on their strength is something that Z Holdings and Mr. Kawabe and his team will be working on.

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Unidentified Company Representative, [29]

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Next question, the gentleman next to him.

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Unidentified Participant, [30]

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[Ishino], I’m a freelance writer. Two questions. First of all, I wanted to ask about the existing 5G. So area coverage, you said is only a spot. But what about subscriptions, contracts? Can you give me the number of companies? Just a general picture, whether it’s on target.

And then my second question, you mentioned about 60% 5G. I think it was FY 2023, you are aiming for 60% users to be 5G. That seems as a — it looks like it’s a cumulative 60%. It’s not new. 60% new adds, this is a cumulative that’s stock, the 60%?

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Unidentified Company Representative, [31]

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Yes, that’s right.

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Unidentified Participant, [32]

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60% of all 5G contracts — subscribers, which means that you really have to increase a significant amount of volume. What’s your tactics?

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Unidentified Company Representative, [33]

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Well, your second question, let me answer that first, at least. I believe that people will switch to 5G all at once. I think in 2021, ’22, the network, maybe end of 2021, the population coverage will be about 90%. So wherever you are, you’ll be able to use 5G, which means that, for sure, there will be shift switched to 5G. Just as we saw the world switched from 3G to 4G and probably much quicker than it happened at that time.

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Unidentified Participant, [34]

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Do you have the sales about smartphones? What’s the 5G handset?

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Unidentified Company Representative, [35]

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This is in line with the plan, [about 24.5 million]. So we have 4 different models of 5G handsets. This is still a world of showrooms. We’re still showcasing it because the network is not 100% coverage. But it will start to really roll out full scale maybe latter half of this year, late fall. Google announced about the 5G handset, OPPO and ultimately, I’m sure iPhone will release 5G handsets. So I don’t know, but I’m sure they will. So then we will see a full-scale 5G handsets, which means that the network will be built out. Is that all right? Thank you.

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Unidentified Company Representative, [36]

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We would like to take the last question. Anyone with a question? In the center block, it’d be gentleman in the fourth row.

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Unidentified Participant, [37]

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From Nikkei Business, my name is [Sato]. I have 2 questions. You have talked about 5G handset sales being according to the plan. The COVID-19 impact, was there anything to the selling of the 5G handset sales? Was there any COVID impact?

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Unidentified Company Representative, [38]

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The original plan for 5G was that we will start selling a 5G handset not in a large scale. So there was not much impact. Mr. Shimba, any comments from you?

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Jun Shimba, SoftBank Corp. – COO and Head of Consumer Business Unit, Product & Marketing Unit [39]

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Thank you for the question. I would like to respond to that question. Overall, we are almost on track. But frankly speaking, activities, there were some COVID impact, but the 3 models that we have launched and the new model that we have launched in July. In total, we were able to get to the planned levels. I may be repeating myself, but the new smartphones which will be released, that will be compatible with 5G, and that will be counted as 5G sales. And towards the second half, there would be significant increase in the lineup of 5G handsets. So I think that there will be acceleration in the adoption. There were some COVID impact, but most of the models will be launched in the latter half. So it is as Mr. Miyauchi has mentioned in his response.

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Unidentified Participant, [40]

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I would like to move on to the second question also about the handset. There was a decrease by [160,000]. And compared to other carriers, the — this decrease amount was smaller. So why were you able to keep it — keep the decrease at 160,000 . The other companies have said that the decrease of the handset led to decrease in the cost, meaning that there was improvement in the profitability, but how was your case?

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Unidentified Company Representative, [41]

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The Consumer business, mobile and SoftBank brand, the SoftBank brand debut plan and the growth there was steady. So even though of the sales activities for the 2 months and the customers were able to visit only through reservations and the operation hours was less than half from 11:00 to 4:00. So there was a drop in the handset sales, but the consumers had also shifted digitally. So because of that, compared to last year, there was a first circumstances.

As for the Enterprise business, because there was not a full lineup of the handset — of the devices, inclusive of the iPads, where the inventory level was very low, the sales had grown steadily. So compared with last year, the negative impact was about 10% in the devices. So the competitors have said that there was a drastic drop in the sales of the handsets. But our feeling is different.

So there — in Docomo, there are many handset upgrade customers, so maybe that’s why there was a huge drop. But as Mr. Shimba mentioned, there was a drastic turnaround in June. So April and May drop was something that was unavoidable in order to save lives. But going forward, with the new launch of the handsets, we would be able to move steadily.

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Unidentified Company Representative, [42]

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So that will be all for the questions from the venue. Next, we would like to take questions on the Zoom. (Operator Instructions)

So Mr. [Inoue] from Asahi newspaper.

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Unidentified Participant, [43]

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This is [Inoue] from Asahi newspaper. Can you hear me?

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Unidentified Company Representative, [44]

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Yes, I can hear you.

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Unidentified Participant, [45]

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One question. So the companies that’s handling dealing with Huawei and 5 other Chinese players will be restricted in the United States. And related to that, you are partially adopting Huawei equipment. Now you are in progress switching to European products, but what is your schedule on this? And Huawei and ZTE smartphones are also adopted. What is the impact of adopting them, their handsets?

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Unidentified Company Representative, [46]

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So with regards to network equipment, your first question, as you know, in 5G, we have completely shift — switched to Nokia and Ericsson. As for 4G LTE, there’s partial Huawei equipment, but all the core equipments are switched to non-Chinese. So in that sense, we are in line with the guidelines of Ministry of Internal Affairs and Communications, MIC, and I don’t think we have any issues with the telecommunication equipment.

Mr. Miyakawa, any additional comments on this?

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Junichi Miyakawa, SoftBank Corp. – CTO, Head of Technology Unit & Technology Strategy Unit and Representative Director [47]

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No, I don’t have anything to add.

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Unidentified Company Representative, [48]

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So that’s the situation. With regards to smartphones, at this point in time, we have been discussing, but they have not instructed us through the guidelines to stop adopting Huawei handsets. So that is why we have been handling, selling Huawei handsets. But as for new handsets, how we handle them, how to sell them? We will consult with the government to decide what we plan to do. So that’s the stage we’re in. Does that answer your question?

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Unidentified Participant, [49]

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Yes. One more. May I ask one more question? With regards to the work style, I believe that, yes, you’re doing a lot of remote work, but you also have plans for new office building. What is the impact there? Do you have any changes?

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Unidentified Company Representative, [50]

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With regards to the new office building, there’s absolutely no change. However, what we’re looking into today is that up until now, we were planning to have SoftBank Group and SoftBank KK. But because of this environment which we’re in, we believe maybe we can open up to other group companies. So we’re just in the studying stage.

If I go into too much details, maybe I will be miss — skipping some other names. But I would say today, we should be able to occupy just 30%, 40% of the office space. I think a remote work is very central, very at the core.

The new Takeshiba office building is a completely smart office building. That district is tying up — covering the Tokyo Metropolitan Government to do a smartphone — a smart city project. So there’s no change in that sense. But we think we can have — open up to more company, group companies to join us in that office building. So we’re still studying that right now.

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Unidentified Company Representative, [51]

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Due to the constraint in time, we will have the last question now from (inaudible) newspaper. Mr. [Saito], please.

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Unidentified Participant, [52]

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This is [Saito]. There are 2 questions that I would like to ask you. If you could answer one by one. The first question, MIC recently have said that they are accelerating the deliberation on the competition of the telecommunications and, for example, MNP portability commission fee. And for the fixed lines, the renewal month should be extended to 3 months or so. So there are a lot of discussions going on, and I was wondering what is your take on the initiatives going on at MIC?

And in forecasting your business performance, when there is a reduction of the commission that you would be able to receive and also the risk of decrease in the — decrease and in the communication cost, how do you — how would you be responding to it?

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Unidentified Company Representative, [53]

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In terms of the response to MNP, MIC has come to talk to us. But one point that I can state here is that the customers will — when the customers go to the shops or call the call center, there will be cost generated for the response of the customers. When there is a device upgrade, it will take about 1.5 hours. And the smartphones is — smartphone upgrade is easier to do. However, there are a lot of things at the staff that the shop’s staffs would do, and there are many calls that call centers takes on an everyday basis.

MNP see reduction. I think that will be very difficult because there are costs generated. So if everyone can do everything on the Internet, maybe the fee can be reduced to 0. But considering the functionality of the shops or the call centers, I think that the fee should still be incurred for MNP.

And whether that would impact the pricing, well, ICT Research Institute has recently conducted a survey and the highest price of Docomo and the European pricing was compared. But I think that’s very unfair. We have to think about the quality of the network. We have to think about the relationship of the quality of the network and the price of the telecommunications.

LTE and network in Japan and 5G network in Japan. The 3 major companies will compete like crazy to create a high quality network. In that sense, considering the quality, the pricing that we have is the midrange, and there is a discussion that the pricing is too high, but now we have 3 brands. And if you use Y!mobile, it’s cheaper. And even in SoftBank brand, those who don’t use the communication so much and they will be able to use the debut plan. And if they can use it at JPY 1,980 in the first year and from the second year on, it’s still JPY 1,980, it’s quite cheap. So customers have a range of choices.

I’m sure that there would be a lot of requests to our company, but I don’t think that will damage the company to a huge extent. We are working to improve our cost efficiency. And going forward, even in the 5G network, we are considering how we will be able to provide it in a reasonable pricing.

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Unidentified Participant, [54]

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And I would like to move on to my second question, Rakuten Mobile impact. This fiscal year’s business forecast and what you have announced today in the forecast of medium term plan. And how would — how have you factored in the impact from Rakuten Mobile entry into this market?

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Unidentified Company Representative, [55]

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So I don’t know how Rakuten Mobile will be building the network going forward, so I am not able to comment on that point. But at this point, I don’t think that they have become a huge threat to us. It all depends on what — how good a network that can be built. So if we don’t get to 90% population coverage, we would not be able to have as full-scale service in 5G to our customers.

Rakuten Mobile is using the roaming service from KDDI. And from the customers, it looks like Rakuten’s network. But it all depends on how they would be able to build their own network. In the case of us, we have 230,000 sites. If Rakuten can get to that level, they will be a serious threat. But according to what we hear in their plans, even though they may expand their business to us, to KDDI or to Docomo, that will not be a definitive threat. I don’t think that they will be a — Rakuten will be a threat if their plan stays as is.

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Unidentified Company Representative, [56]

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Thank you very much. So we would like to conclude the question-and-answer session on the Zoom. And that will conclude the briefing session for the first 3 months of this fiscal year. The — we will be distributing the briefing session on the Internet on a later date. Thank you very much for coming to this briefing session. Thank you very much for your attendance.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

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